Hugh Hendry predicts crisis will spread to Asia

May 03, 2012|Tommy Wilkes and Anjuli Davies | Reuters

(Kieran Doherty Reuters, REUTERS)

LONDON (Reuters) - Hugh Hendry, one of the hedge fund industry's most outspoken managers, has warned that the economic crisis is headed for Asia, with the region's largest economy, China, struggling under a bursting property bubble and tumbling demand for its exports.

Hendry, who runs Eclectica Asset Management, which has around $700 million in assets, said in his first investor letter of great length since the winter of 2010 that he was "more pessimistic on Chinese growth than ever."

"This makes us bearish on most Asian stocks, bearish on industrial commodity prices, interested in some US stocks, a seller of high variance equities and deeply concerned that Japan could become the focal point of the next global leg down," the manager said in the April-dated letter obtained by Reuters.

He cites Japanese group Hitachi as "too expensive" whilst buying 5-year CDS on Toshiba.

Scotsman Hendry, who is well-known for his contrarian, bearish bets on markets, has in the past profited from his stance on China.

Last year his Credit Fund grew 46 percent after buying credit protection on Japanese stocks exposed to Asia's largest economy.

Hendry said in the letter that some Japanese companies are "corporate zombies" which will sooner rather than later fall prey to over exposure to Chinese exports, high leverage and opaque and bloated balance sheets.

"It is hard to escape the impression that Japan's blue-chip companies are teetering on the brink of extinction," he wrote.

At the heart of Hendry's concerns about China lies his belief Beijing has presided over a massive property bubble while allowing government debts to grow too large.

The country will also struggle to maintain its export-supporting currency peg with the U.S. dollar just as a slowdown in European growth crimps demand for its goods.

"It has long seemed to us to be the case that this economic crisis would start in the US and make its way to Europe. That has happened. However, we also think it will end in Asia," he said in the letter.

Hendry hit the headlines in 2009 after posting videos on YouTube after he travelled to China to film empty office buildings to support his argument about a real estate bubble. In the letter he also promises "no more YouTube videos."

Hendry also said he was more bullish than most about U.S. growth prospects, believing price restructuring in debt and labor markets as well as huge advances in shale oil extraction will maintain the economy's position as the world's largest.